In This Article:
Today we are going to look at NNIT A/S (CPH:NNIT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for NNIT:
0.17 = ø268m ÷ (ø2.7b - ø1.1b) (Based on the trailing twelve months to June 2019.)
Therefore, NNIT has an ROCE of 17%.
View our latest analysis for NNIT
Does NNIT Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see NNIT's ROCE is around the 15% average reported by the Healthcare Services industry. Independently of how NNIT compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
NNIT's current ROCE of 17% is lower than 3 years ago, when the company reported a 33% ROCE. So investors might consider if it has had issues recently. You can see in the image below how NNIT's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for NNIT.
NNIT's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.